Market Commentary - March 2025

March 2025

February Market Recap: A Tale of Two Halves

February was a month of two distinct phases. The first half extended January’s momentum, with the S&P 500 reaching a new all-time high and broad participation across small-caps, mid-caps, and the tech-heavy Nasdaq, all posting solid gains.

However, the latter half of February saw a sharp shift as market sentiment soured amid tariff threats with key trading partners, rising inflation expectations, government layoffs, and concerns over immigration and slowing economic growth. Volatility spiked to its highest level since mid-December, mirroring the strong-start, weak-finish pattern seen in December.

While the Dow and S&P 500 ended February in positive territory year-to-date, up 3.1% and 1.2% respectively, broader markets finished lower. The Russell 2000 led declines, sliding 5.5%, followed by the S&P 400 Mid-Cap index (-4.4%) and the Nasdaq (-4%). The Dow and S&P 500 fell more modestly, dipping 1.6% and 1.4%, respectively. A bright spot was Large-Cap Value, which eked out positive gains.

International and Bond Markets

In contrast, global markets performed well. The MSCI EAFE index climbed 1.8%, driven by strength in Germany, France, and the UK, bolstered by a 0.25% rate cut from the Bank of England and a weaker U.S. dollar, which fell 0.7% in February. Emerging markets also edged higher by 0.4%. While U.S. equities have outperformed international stocks for over a decade, it remains too early to call 2025’s international strength a long-term trend.

Bonds rallied as investors sought safety amid stock market volatility. The Bloomberg Aggregate Bond Index gained 2.3% in February, bringing its year-to-date return to 2.7%. The volatility seen in equity markets over the past few years was largely driven by bond market fluctuations and rising interest rates due to Federal Reserve policy shifts. Now, with rates at more normalized levels, attractive bond yields are helping stabilize portfolios.

The 10-Year Treasury yield declined 0.34% in February, closing at 4.24%. However, persistent inflation, trade uncertainties, and geopolitical tensions dampened early-year expectations for multiple Fed rate cuts. By mid-February, markets were pricing in just one rate cut for 2025, but slowing economic growth and escalating trade concerns pushed expectations back to two cuts by year-end—aligning with the Fed’s own forecast, though subject to economic data.

March Update: Unresolved Risks Keep Volatility Elevated

Market turbulence continued into early March as February’s key concerns remained unresolved, pushing major U.S. indexes further into negative territory year-to-date—except for the Dow, which has stayed resilient since January’s choppy start.

While a soft landing remains the base case, the Atlanta Fed’s negative Q1 GDPNow forecast rattled investors, raising recession risks. Consumer sentiment also weakened in January, adding to caution. Meanwhile, the March 14 deadline to pass a budget continuing resolution (CR) looms, with the usual Congressional standoff heightening fears of a government shutdown.

International markets extended their outperformance in March, aided by further U.S. dollar weakness, now down 4.3% year-to-date.

Bonds have dipped slightly in early March but continue to provide stability against stock market volatility. The 10-Year Treasury yield edged up to 4.32% from its recent low of 4.16%, while the Bloomberg Aggregate Bond Index remains up 2.2% YTD, with a yield of 4.67%. Fed rate cut expectations have risen amid market uncertainty, but policymakers are likely to remain patient as the new Trump administration’s policies take shape. The Fed's FOMC meets March 18-19 and expectations are for no change in policy rates; Economic Projection materials will be released and closely scrutinized by the market for policy guidance. 

Outlook: Stay Diversified Amid Volatility

Diversification remains a key theme for 2025, as expected. We continue to emphasize disciplined portfolio strategies given the broad range of variables affecting markets. Despite heightened volatility, our cautiously optimistic outlook for the year remains intact.

We continue to encourage investors: